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Fed chief hints at rate rise
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June 17, 1999: 1:56 p.m. ET
Greenspan signals need for 'pre-emptive' strike against inflation
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NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan Thursday said the central bank needs to take "pre-emptive" steps to keep the economy growing with little inflation, in a sign the Fed may boost interest rates.
"While this stellar non-inflationary economic expansion still appears remarkably stress-free on the surface, there are developing imbalances that give us pause," Greenspan told the Joint Economic Committee of the U.S. Congress.
A shortage of workers to fill job openings at home, rebounding economic growth overseas, robust consumer spending and a continuing stock market rally are among the factors for acting to curtail inflation, Greenspan said.
"For monetary policy to foster maximum sustainable growth, it is useful to pre-empt forces of imbalance before they threaten economic stability," he said, adding "modest pre-emptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy."
Looking to be pre-emptive
Economists said Greenspan's comments were a sign the Fed's policy-making body will boost interest rates at its meeting June 29-30.
"He used the word 'pre-emptive,' which was the signal he used before the March 1997 rate hike," said Ian Shepherdson, chief U.S. economist with Valhalla, N.Y.-based High Frequency Economics.
"I get the impression he is building the market up to expect a rate hike at the June Federal Open Market Committee meeting," William Sullivan, money market economist at Morgan Stanley Dean Witter, told CNNfn.
What economists weren't sure about is whether Greenspan's remarks indicated there would be more than one rate boost in the coming months.
Sullivan said he senses that Greenspan is "indicating this may be the last change in monetary policy for a while."
But Rob Palombi, markets analyst with Standard & Poor's MMS., said the Fed chief is "preparing the market for a rate hike, and possibly more than one down the road."
Bias toward tightening
Fed policy makers indicated at their last meeting May 19 that they're poised to move rates higher.
An increase in the trend-setting fed funds rate - currently at 4.75 percent -- would automatically push up interest rates at commercial banks, making borrowing for consumers and business more expensive, discouraging spending.
That would tend to slow the economy and keep prices in check, since consumers and businesses would be less willing to spend for goods and services.
That's what Greenspan and the Federal Reserve want to do now rather than later, Stephenson said.
Putting on the brakes
In March 1997, the Fed raised short-term interest rates by a quarter percentage point to 5.5 percent. But Asia's economic crisis erupted a few months later, and spread to Russia and Latin America in 1998, the Fed did an about-face. It cut short-term interest rates three times in a bid to protect the U.S. from the turmoil overseas.
In fact, economic growth in the U.S. has reached the point at which it may now need to be slowed.
"He's highlighting the need for the Fed to be pre-emptive against inflation - and part of that may involve reversing last fall's rate cuts," S&P's Palombi said.
While the Fed does not see any current inflation -- prices were unchanged last month -- the continued tightness in the labor markets could lead to rising prices, something the Fed wants to prevent before it happens, Morgan Stanley's Sullivan said.
More productivity talk
Greenspan again said advancements in computers, machinery and other technologies have made U.S. workers and companies more productive, allowing them to keep costs and prices down. But "labor productivity has not grown fast enough to accommodate the increased demand," he said.
In addition, the Fed chief expressed concern that the market values of companies involved in those technologies may not be appropriate.
Responding to a panel member's question, Greenspan said, "What is not clear is whether the market values that are being placed on particular assets involved in this technology revolution are appropriately priced."
Greenspan also addressed the U.S. stock market, hinting in his testimony that a rate rise might not be a bad thing for what could be construed as an overvalued market.
"To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong," the Fed chief quipped. Nonetheless, "while bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy," he said.
U.S. financial markets took Greenspan's comments to be reassuring. The yield on the 30-year benchmark Treasury bond fell to 5.98 percent from 6.06 percent late Wednesday. The Dow Jones industrial average was little changed, but the Nasdaq composite index was moderately higher.
--from staff and wire reports
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